Transnet: Focus on efficiency

[Steve Appleton]

Published in Financial Mail, 1st July 2011. http://www.fm.co.za/Article.aspx?id=147297

Cover story 3 - Transnet
Focus on efficiency
Razina Munshi
Thursday, 30 Jun 2011

Today, with rail, ports and pipelines at its heart, the parastatal is a more manageable entity, says CEO Brian Molefe

If Transnet’s ambitious plans for the transformation of transport infrastructure are realised, SA’s economy will receive an invigorating injection. But they are not that easy to execute or achieve.

It intends to spend R110bn over the next five years to rehabilitate assets and increase productivity.

Having spun off its non core assets, Transnet is a vastly different organisation from 20 years ago, when it was a financial nightmare. It sold SAA, its travel agencies and other units, leaving it with a focused freight business.

Today, with rail, ports and pipelines at its heart, the parastatal is a more manageable entity, says CEO Brian Molefe. “Ten years ago, it could not have borrowed money on the strength of its balance sheet. Today it can, and we are in a position to focus on productivity improvements.”

He says the strategic advantage of having ports and rail in one organisation must be used to better co- ordinate the movement of freight.

Transnet won’t be able to fund all its plans itself. The R110bn is just a portion of what it needs. Nor can government fund Transnet’s infrastructure plans , so the bulk of investments will need to be sourced from the private sector.

But will this entail the sale of more Transnet assets? Molefe is pragmatic. Privatisation, he says , is not off the agenda, but neither is it on it. “ The decision must be informed by the material conditions that confront us at a particular time, as well as the circumstances in that industry.”

He says one cannot be dogmatic about privatisation, or even nationalisation. Where private participation does occur, it is likely to be in the form of public- private partnerships (PPPs), the model used to fund and construct the Gautrain.

The old Durban airport, which Transnet will acquire from the Airports Company SA (Acsa) and turn into a port , is expected to cost about R30bn to develop. Th ough a price for the land has not been set, Transnet has budgeted R1,5bn and hopes to conclude the deal in the 2011/2012 financial year.

The parastatal will consider getting a partner to build, operate and then transfer the port back to Transnet, as a means of financing it, says Molefe. Ship-building at Cape Town harbour could also be attractive to private-sector investment.

But he says Transnet will not consider private-sector involvement at the Ngqura port in the Coega Industrial Development Zone, which Transnet spent R16bn developing into a trans- shipment hub (a point on the journey of goods).

A typical private-sector consortium bidding for a project would consist of financial institutions, construction companies to build it, and operators to run it. The private partner would assume the bulk of the financial, technical and operational risk.

Government or its agencies might provide the land, as well as some risk and credit guarantees. It could also introduce legislation to aid the process.

However, over the past few years, the use of PPPs has slowed dramatically. For example, government’s flagship project, the R4bn upgrade of Chris Hani Baragwanath Hospital in Soweto, has been five years in the making.

But there’s a new sense of urgency. The transport department will set up a project finance unit within a year, which director-general George Mahlalela says will ensure better co-ordination and prevent duplication within state-owned enterprises.

National treasury already has a PPP unit to administer large projects. The most recent project registered as a PPP is the Passenger Rail Association of SA’s Moloto Corridor rail link, a 120km commuter service that will replace 550 subsidised buses transporting 45000 passengers in each direction daily.

Investors are likely to be contractors which hope to build the assets. French firm Bouygues Travaux Publics and local group Murray & Roberts’ stake in the Gautrain is a good example . Their investment in the construction costs of the Gautrain will be repaid by user fees over the 30-year concession.

Debt funding, used extensively by Transnet, Acsa and Sanral, will also be used as a means of infrastructure finance. The bulk of Transnet’s planned capital expenditure exercise will be funded through its global and domestic medium-term note programme.

The freight rail projects (see graphic on page 29) announced by Transnet are intended to increase capacity considerably to the benefit of its customers, which are mainly mining companies. For that, government hopes mining companies can help finance the costs of construction.

For example, Transnet would be able to procure finance for construction or expansion if it could get price and usage guarantees from a company intending to use a railway line, says Futuregrowth chief investment officer Andrew Canter.

Some of the potential concessions could include the expansion of the coal line to Richards Bay, the iron ore line from Sishen to Saldanha, and the manganese line to the Ngqura deepwater port at Coega.

Within the next 18-24 months, Transnet also intends constructing a 70km general freight rail line from Swaziland to Richards Bay to alleviate pressure on the coal line.

Canter says local investors, particularly institutional equity and debt funders, who have been funding local infrastructure for years, are more likely partners than international investors. SA’s banking sector, for example, understands the regulatory framework, making it a better partner than international banks. Foreign partners could be drawn in for capital and specialist skills.

Transnet itself hopes to be a source of expertise. After the completion of its productivity drive in about five years, Molefe says, the organisation will look to the north. This is part of public enterprises minister Malusi Gigaba’s bigger strategy for state-owned enterprises to expand into the rest of Africa. “Transnet’s presence on the African continent should increase,” confirms Molefe. “There are huge opportunities and we have the skills and experience to participate.”

Wagons, locomotives and other infrastructure produced by Transnet Freight Engineering, for example, could be manufactured for export.

Though Transnet has a blueprint to revitalise freight logistics, the projects have to pass a feasibility test. The result might be that not all these grand projects will materialise.